Last March, Los Angeles voters rejected proposed limits on the construction of large-scale buildings, limits that included a two-year moratorium on development of dense, high-rise residential properties. In a city where working-class and middle-income households are increasingly forced to prioritize housing costs over medical care, food and even transportation, it was a decisive defeat for ballot Measure S. But will augmenting the pace and quantity of available dwellings really make living here more affordable for anyone but the super-rich?

The UCLA Ziman Center for Real Estate, formed in 2001 as a joint center of UCLA Anderson School of Management and UCLA School of Law, studies the problem of housing affordability as it reaches crisis levels in California. The constraints are especially acute locally because although there is an immense amount of wealth concentrated in L.A. and land values are extremely high, ours is a very expensive city with no real wage growth within the working class. Among Ziman’s objectives is to create meaningful forums for business leaders, entrepreneurs, industry professionals and public policymakers to examine precisely this kind of crisis in conversation together — and to produce research that helps them arrive at collaborative solutions.

Ziman as a center of excellence is either undertaking or sponsoring research that explores: local-level regulatory constraints that result in housing scarcity; new mortgage designs to enhance affordability; the efficacy of low-income housing tax credits; and the policies that have led to crisis-level unaffordability. Ziman partners annually with the nonprofit Mercy Housing California to organize a symposium on topics germane to professionals in real estate, government and industry — but with a crucial public education component consistent with the mission of Ziman’s Howard and Irene Levine Program in Housing and Social Responsibility to promote the kind of dialogue that improves society in all economic sectors.

Mercy Housing is a national nonprofit organization that provides affordable housing and supportive programs to improve the economic status of residents, revitalize neighborhoods and stabilize lives. Mercy’s work spans 41 states, with its largest regional division in California. The organization serves a variety of populations that include low-income families, seniors and people with special needs, and acquires and renovates existing housing, as well as develops new affordable rental properties.

The most recent event in the Ziman-Mercy partnership brought together academics, public servants, business leaders and real estate developers for a half-day symposium titled Moving Forward: Building Housing for L.A.’S Working Class and Middle Income Residents. Keynote speaker Ben Metcalf, director of California’s Department of Housing and Community Development (HCD), unveiled the Statewide 2025 Housing Assessment, the first such report to summarize California housing development projections since 2000’s Raising the Roof. The report reveals, among other things, that overall homeownership rates are at their lowest since the 1940s, while at least 30 percent of all California renters are housing constrained, or “rent burdened,” as the report calls it. This means they spend minimum one third of their income on rent every month. With land prices alone exceeding what average Angelenos can afford, low- and middle-income housing is built only with large public subsidies.Ziman board member Kevin Ratner, president of Forest City Residential West, is a for-profit developer who leverages incentives like density bonuses to encourage affordable housing developments. Participating in the recent panel, Ratner said the biggest conundrum is in a luxury-level housing market whereby people who can’t afford rents and mortgages face no choice but to earn more and more money, endure distant commutes or leave altogether. “If you cater only to the top of the market,” he said, “affordability cannot be designed into your plan.”

How can cities be intentional about preserving access among existing stakeholders and carve out pockets of affordability in gentrifying neighborhoods?

This is where UCLA’s collaborative research comes in. Professor of Urban Planning, Social Welfare and Asian American Studies Paul Ong brought to the Moving Forward conversation his expertise in the areas of gentrification and displacement. Ong is director of the Center for Neighborhood Knowledge, which focuses on translating socioeconomic research into actionable neighborhood-related policies and programs. “The extreme ends of the spectrum are increasing at the expense of the middle in terms of household median income, and L.A. is the most expensive city relative to income,” said Ong. The foreclosure crisis that drove the recession alienated first-time home buyers and pushed property owners back into the rental market. With this, Ong said, came a noticeable shift to more expensive homes being built.

Because for developers and builders, cost is cost, irrespective of what buyers or renters can afford to pay. And no panelist disagreed that L.A.’s regulatory environment is restrictive to an extremely counterproductive extent. “We have the longest gestation period between getting a permit and starting new construction,” Ong said.

“We need to spine up,” said panelist Ann Sewill, referring to leadership — developers as well as policy makers. Sewill is VP of housing and economic opportunity at the California Community Foundation. She was introduced as “everyone’s favorite housing advocate.” She said production is the key to addressing housing affordability and it needs to be less impeded. Streamlining city permitting by reducing the process from four to two years would revolutionize local development, panelists agreed.

Rick Jacobus, a consultant at Street Level Advisors, which helps design or implement inclusionary housing policies, said, “The affordable housing problem is perennial; the middle income housing crisis is a market failure, which is about volume.” He observed that the housing market is segmented. “They behave differently,” he said. “Prices don’t come down evenly across segments. Luxury prices drop as demand goes down, but the middle doesn’t.”

But he also stressed that just building more and more isn’t any more sustainable than subsidizing more and more. “People understand that building empty cities won’t happen in America; who will finance empty skyscrapers?”

Sewill pointed out that new construction can cost $500,000 per unit in the densest areas of L.A. “Cost is what it is irrespective of intention or mandate to provide affordable housing. Nonprofit or for-profit, builders are builders. We need intentional targeted production that takes into account underreported income disparities.”

But are tiny units with no parking viable solutions?

Building smaller units is one solution, said Ratner. But many pre-fab and multi-family enterprises have been spectacular failures because even heavily subsidized projects can’t keep production costs low enough to meet working-class and middle-income thresholds of affordability. He said cities like San Francisco may put housing preservation dollars toward affordable dwellings, but if they are housed in buildings for which the mandate expires, developers can then take the once-affordable units to market for the highest price.

Experts and public alike are still trying to determine the best post-redevelopment models for subsidized housing. Mercy Housing California’s president, Doug Shoemaker, said, “We try to spend our affordable housing funding to solve multiple problems. We need a move to acquisitions and rehabs.” California is also revisiting ordinances for “non-conforming” apartments and what are classed as accessory dwelling units (“backyard homes” or “granny flats”), broadening regulations and defining them as priced below market for the areas they rent in.

Ben Besley, vice president of development at City Ventures and board chair at the Housing Authority of the City of Los Angeles, believes the solution lies in 3–4 bedroom town homes that cost around $70 per square foot to build and are priced at $350,000–$375,000, yielding a profit margin of a quarter million dollars. “This building typology is the way to get density at the highest residual land value,” he said, advocating bringing buyers into the political process and involving the private sector.

But density and transportation infrastructure cannot be factored out of the equation. Ziman Center Executive Director Tim Kawahara and others believe that L.A. needs more “upzoning” in appropriate locations tied to public transit and areas that promote walkability. “L.A. is updating its badly outdated planning system and 35 community plans that guide neighborhood-level development across the city,” he says. “This process will shape how L.A. will look for at least a generation.” The hope is that the city’s efforts lead to a more thoughtfully planned metropolis with equitable housing options for all residents.

There’s no question that affordable housing is a growth industry — transformative developments like those Mercy manages are proof. But growing income and wealth inequality is affecting the whole country, and in the current regulatory environment developers stand to make the best and easiest money in the luxury housing market.

So why should an MBA — let alone an established business mogul — about to embark on a career in lucrative real estate transactions care about middle-income affordability when incentive is greater to encourage luxury housing and commercial starts?Kawahara says that new constraints on the middle-income tier have far-reaching implications for the economy as a whole. “On a practical level,” he says, “it’s harder for businesses large and small to attract talent for hire if housing is too expensive. Entire companies will decamp to other states as their ability to turn a profit in California declines.” With more accessible housing will come better, higher-paying jobs in real estate acquisitions and property management that require the business acumen of an MBA.

Universities should care, too, Kawahara says: “The current market alienates higher education faculty who can live more affordably elsewhere — even in towns with prestigious private colleges. This hurts rankings of California universities.”

There are health implications, as well, says Professor of Finance Stuart Gabriel, Ziman Center Director and UCLA Anderson Arden Realty Chair. People trying to afford housing in neighborhoods close to their workplaces or to decent schools must often accept environmental dis-amenities like adjacency to major freeways, which has proved hazardous. Ironically, some developers believe building close to freeways will increase use of public transportation options; but meanwhile, dangerous particulate matter from traffic congestion shows no sign of abating.

Gabriel’s latest research investigates the broad economic effects of the 2009 California Foreclosure Prevention Act and other crisis-period foreclosure prevention laws that attenuated the decline of the California housing market. The annual Mercy collaborations are meant to spark new thinking around widespread access to housing in expensive markets like L.A. Ziman produces research that can inform policy and industry alike. As Gabriel says, “State agencies and nonprofits have neither the staffing nor the resources to undertake fundamental assessment of the causes and broader consequences of the lack of housing affordability.”

02/13/2017

Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA, said he expects the administration will have a conservative tilt in housing policy, but he noted that it’s uncertain how the debate over housing policy will play out.

02/09/2017

Kathleen Smalley, a partner at Locke Lord LLP, wrote a recent UCLA economic letter to investigate the lack of uniformity in real estate finance law following the recent mortgage crisis and how the presidential election has reignited the conversation. While there isn’t currently a strong movement to create uniformity, Smalley opens the floor for discussion. We sat down with Smalley to discuss the letter and her perspective on the need for more uniformity in real estate finance law.

01/27/2017

For many developers, it doesn’t make fiscal sense to include affordable housing, said Eric Sussman, a developer who teaches at UCLA’s Ziman Center for Real Estate. Sussman said affordable housing “caps my rent, and creates a lot more paperwork and management burden.”

“Developers are about as capitalist as you get. Like them or love them, or hate them, it’s just economics,” Sussman said.

01/25/2017

Paul Habibi, an apartment developer who is also a professor at UCLA’s Anderson School of Management, said he understands the concerns about favoritism for luxury developers seeking one-off approvals to Los Angeles’ outdated zoning code. But he said the shortage of housing is so severe that “you just can’t build enough units at any price point.”

“The reality is that growth needs to come from all directions, whether it’s high-end housing, midtier or the subsidized affordable units,” he said.

01/24/2017

For many developers, it doesn't make fiscal sense to include affordable housing, said Eric Sussman, a developer who teaches at UCLA's Ziman Center for Real Estate. Sussman said affordable housing "caps my rent, and creates a lot more paperwork and management burden."

"Developers are about as capitalist as you get. Like them or love them, or hate them, it’s just economics," Sussman said.

01/23/2017

The 10 largest multifamily projects that are either proposed or in construction would add 5,410 residences to the Hollywood market. “There is a need for more density and to bring the cost of housing down,” said Eric Sussman, a managing partner at Sequoia Real Estate Partners, a Westwood real estate investment company.

01/18/2017

“The air is very thin at this segment of the market,” said Paul Habibi, a professor of real estate at UCLA. But this is L.A. Fortune and wealth often can materialize overnight, whether from someone overseas looking for a place to park his money or a tech titan riding the wave of a newly minted IPO.

Habibi doesn’t expect the buyer to come from the old-money crowd. “Anybody who has had money for a long time knows better than to spend it on a $250-million house,” he said.

About UCLA Ziman Center for Real Estate

UCLA Ziman Center is a multidisciplinary research center of UCLA Anderson School of Management and UCLA School of Law. We seek to advance thought leadership in the field of real estate by generating influential research, educating the next generation of leaders and providing meaningful forums for industry professionals and policy makers.Read More About Us

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Disclaimer: The opinions expressed on the UCLA Real Estate Wire are those of the individual contributors and not of UCLA Ziman Center for Real Estate, UCLA Anderson School of Management, or UCLA School of Law.